TD-First Horizon deal falls through

Political heat, regulatory foot-dragging kill takeover

In early May, Toronto-Dominion Bank (TSX: TD) called off what would have been the largest acquisition in its history.

The bank, which has a large presence in the Eastern U.S., announced that it and First Horizon (NYSE: FHN), the Tennessee based regional U.S. bank it had agreed to buy in February 2022 for $13.4 billion (figures in U.S. dollars), had mutually agreed to terminate the deal.

TD ran into hurdles getting regulators to sign off on the plan, which had originally been set to close in November 2022, and subsequently by the end of May this year. The bank said it couldn't be sure when, or if, it would get the necessary approvals, so the two banks decided to terminate the deal.

TD will pay First Horizon $200 million in addition to the $25 million it was due under the merger agreement, which will help First Horizon boost its capital ratios. Bryan Jordan, First Horizon’s CEO, said TD and First Horizon didn't discuss extending the timeline for the deal, lowering the price, or changing its structure.

“We were engaged with TD, working hand in hand to win regulatory approval and we were willing to engage in any discussions,” he said. “But it’s not relevant at this point. We signed the mutual termination.”

As a result, First Horizon’s share price plummeted. The stock had been trading at $15, which was 40% below the $25 a share offered by TD. Once the announcement was made, FHN shares plummeted another 33% to $10, while TD’s share price ticked up 1%. FHN subsequently rallied a little.

The deal would have made TD the sixth-largest bank in the U.S. by assets. It would have taken TD into new markets in Louisiana and Tennessee, where First Horizon is the largest bank by deposits, as well as in Texas and Georgia. This would have complemented TD’s east coast footprint.

Politicians posture, TD pays the price

Bank critics such as Democratic Senator Elizabeth Warren of Massachusetts had asked the Office of the Comptroller of Currency (OCC) last year to block the deal, citing “unchecked fraud and abuse” at TD Bank. TD had agreed to a $122 million settlement in 2020 with the Consumer Financial Protection Bureau for charging customers for ATM and one-time debit card transactions without obtaining their consent. To avoid a long and costly lawsuit in the U.S., TD agreed to pay $1.2 billion to settle claims relating to Allen Stanford’s Ponzi scheme, without admitting liability. Stanford ran one of the biggest Ponzi frauds in U.S. history and was convicted in 2012. A similar claim was filed in Ontario, but the court ruled in favour of TD and found no liability.

Bank mergers tend to take a long time, both in the U.S. and Canada. For example, BMO’s $16.3 billion purchase of Bank of the West took over a year before closing earlier this year, and RBC’s purchase of HSBC's Canadian operations is taking longer to close than anticipated. The deal between TD and First Horizon evidently faced more obstacles than the participants had expected.

It’s ironic that the regulators seem to have prevented the deal at a time when U.S. regional banks are facing a flight of deposits and mismatched loan books that have led to a crisis in the system. After the failure of Silicon Valley Bank (SVB) and Signature Bank in March, regional banks have seen their share prices pummeled as investors grew concerned over deposits being pulled from banks perceived as weak.

First Republic Bank was taken over by the Federal Deposit Insurance Corporation (FDIC) before being sold to the largest U.S. bank, JPMorgan Chase. The share price of KBW Regional Bank ETF (NDQ: KBWB) is off almost 40% in the last 12 months and 30% so far this year.

JPMorgan’s CEO Jamie Dimon announced that the First Republic takeover marked the end of the regional banking crisis. But it occurred after JPMorgan and 10 other large banks had injected $30 billion into First Republic in March.

On May 3, the U..S Federal Reserve said that the U.S. banking system “is sound and resilient.” Chair Jerome Powell said that deposit outflows at banks had eased and that the seizure and sale of First Republic should further stabilize the industry. He indicated that he thought the U.S. was in the late stages of the regional bank turmoil.

“There were three large banks really from the very beginning that were at the heart of the stress we saw in early March (both SVB and First Republic were amongst the 20 largest U.S .banks by deposits). Those have now all been resolved, and all the depositors have been protected,” Mr. Powell said.

Really? Let's hope so.

Gavin Graham is Chief Strategy Officer of Calgary-based SmartBe Investments. He is a veteran financial analyst, money manager, and a specialist in international investing, with over 35 years’ experience in global investment management. This is an edited version of an article that originally appeared in the May 8 issue of the Internet Wealth Builder newsletter.

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